Stockbrokers in the Spotlight

You may recall a series of articles that I wrote not too long ago about the potential perils and pitfalls of working with stockbrokers, also occasionally referred to as “registered representatives.”

An article in the January 13, 2009 edition of The Wall Street Journal, Help Wanted: Wall Street Stockbrokers, No Joking, explains just how well some “high-producing” stockbrokers are compensated. (Note, in this case, the description “high-producing” refers to how much revenue they generate for their employers.)

For a somewhat jaundiced (and funny) post on this particular issue, see Milo Benningfield’s article, Stockbrokering: Who Said Retail Wasn’t Profitable?

Benningfield, by the way, is a fee-only financial advisor located in San Francisco. Here’s a summary of his post.

Now that investment bankers and traders have proven such great disappointments to the large Wall Street houses, they’ve taken renewed interest in their retail brokerage operations. And what lucrative operations they are.

Naturally, Wall Street wants to take care of these golden geese.

As ‘registered representatives’ of the brokerage firm, stockbrokers (as they are informally called) are legally bound to represent the interests of the firm, not the client, in any transaction. (Registered reps/stockbrokers should not be confused with ”registered investment advisers,” who have a statutory duty under the Investment Advisers Act of 1940 to put the client’s interests before their own.)

In other words, stockbrokers are a distribution channel for the brokerage firms, and it makes perfect sense that the firms would want to protect and support that channel by offering brokers huge financial incentives.

But all the largess heaped upon the brokers does raise a question: just how are the Wall Street firms, who apparently need a government bailout just to stay in business, expecting to recoup the “partner awards” and other incentives that they’re currently “doling” out to stockbrokers?

To answer that question, dear customer, all eyes are upon you. Caveat emptor, my friend.

Caveat emptor – buyer beware. As always, that’s very good advice. If you’d like to read more about this subject, read The Four Pillars of Investing: Lessons for Building a Winning Portfolio by William J. Bernstein. Pay particular attention to Chapter 9, entitled “Your Broker Is Not Your Buddy.”

Caveat emptor, indeed.